Posted by TJ on Sunday September 6, 2009 @ 11:56 PM
[Tags: business, accounting, taxes]

My friend recently asked me about taxes and structure for starting his own landscaping business. Here is my response.

Should I do business as LLC or a S corp?
If your only going to have one partner (yourself) you would set up a single member LLC. A single member LLC doesn't need a separate tax return as the income is reported on Schedule C of your individual tax return. I believe the annual fee for a Delaware LLC is $250 (this doesn't include additional income taxes).

Can I deduct mileage?
You can deduct all business expenses against the business income. If you use your personal automobile the easiest method to use would be to use the standard mileage rate where you would use the IRS standard mileage rate (2009 is $.55/mile) and keep track of all business mileage and deduct that instead of taking the actual expenses for gas, auto insurance, repairs, etc.
(see IRS Pub 463 for more information) . If you form an LLC I would suggest opening a separate bank account under the business to properly segregate your business from personal expenses.

For equipment like lawn mowers you may need depreciate over the 7 year life, however currently you can deduct the whole cost in the year purchased with section 179.

Do I have to go on payroll?
If create an LLC and you don't have any employees you would not need to file payroll. Once you make money you can take distributions from the business. Distributions are generally not taxed because as a partner you will pay tax on the income of the business each year. The profit of the business is subject to self employment tax (15.3%) (see
Self Employment Tax ) so to calculate roughly your tax:

Income - Expense = Income * (15.3% + Effective tax rate (mine is 27%)) = Tax

So if you had 20k in revenue and 12k in expenses your tax is:

$20,000 - 12,000 = 8,000 * (.153 + .27) = $3,384 Tax

Also, you wont have to worry about this the first year but next year you may
need to make estimated tax payments, or increase your withholding's from you
teaching W-2 to cover the tax owed on the income from the business.

The laws regarding LLC are actually a lot more complex then I stated here but I tried to summarize it.


Disclaimer: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.